By Joe Liebkind | Investopedia
January 19, 2018

Bitcoin was the first cryptocurrency, but as the first iteration of a revolutionary idea, it was born with notable drawbacks.

For instance, one feature of Bitcoin’s blockchain-based currency — security guaranteed by a decentralized method of tracking transactions — is also a flaw when it comes to the speed of transactions. Bitcoin can only process seven transactions per second at the upper limit, whereas Visa transacts tens of thousands in the same period.

That’s why alternative cryptocurrencies have been in development since the beginning of this decade. Their aim is to solve the challenges presented by Bitcoin.

One of the earliest competing visions was presented by engineer Charlie Lee, the thought-leader behind Litecoin.

With scalability and transactability in mind, Lee built a system that focused on delivering a viable cross-border payment platform that would surmount the substantial barriers currently in place.

The resulting coin stands out for embracing many of the values that make the cryptocurrency space so unique from a security perspective while effectively reducing transaction costs.

How Litecoin Works

Like many other blockchain-based cryptocurrencies, Litecoin borrowed from many of the concepts first pioneered by Bitcoin.

Numerous associated activities like mining, encryption, and proof of work are rooted in the same principles as the precursor cryptocurrency, though with some twists and different protocols underpinning its design.

The first and most obvious difference is the total amount of coins available for circulation. Instead of capping the total amount of issuance at 21 million like Bitcoin, the total number of Litecoin available for mining is 84 million.

However, unlike other attributes related to Litecoin, this one distinction is of lesser importance given that just like Bitcoin, fractional amounts of coins can be sent and received.

Where Litecoin really stands out is how long it takes to generate new blocks.

One of the main complaints facing Bitcoin is the sheer amount time it takes for a transaction to be confirmed, which currently stands at 10 minutes. By comparison, Litecoin takes just 2.5 minutes to record these transactions to prevent double-spending, improving the number of transactions it can handle relative to Bitcoin by a factor of four.

In his efforts to ensure Litecoin was a more viable currency platform without being accompanied by secondary solutions, Lee wanted to match the rates of other cross-border transaction processing groups like PayPal.

Apart from giving Litecoin greater transactability, it also improved upon the idea of scalability if the idea were to be adopted by a growing group of users.

How Litecoin Mining Works

The algorithm that Litecoin deploys for confirming transactions on the blockchain, known as Scrypt, is viewed as slightly less complex than the SHA-256 encryption algorithm used by Bitcoin.

Unlike Bitcoin, which largely depends on more specialty mining hardware to accomplish parallel processing power more efficiently, Scrypt’s more simplified design means that ordinary individuals can mine with PC components more common in retail or enthusiast-level machines.

While in the case of Bitcoin, it means that transaction confirmation rests in the hands of the most powerful miners that dominate the platform due to their advanced hardware, Litecoin in some ways can avoid this concentration of influence thanks to its design.

Ultimately, Litecoin is busily positioning itself to usurp market share from some of the more common cross-border transaction hubs like PayPal. One reason Litecoin can accomplish this feat is thanks to the smaller fees associated with each transaction.

Unlike the percentage amount associated with most e-payment methods, confirming a Litecoin transaction only costs 1/1000 of the amount being transferred.

Who Uses Litecoin?

Unlike Bitcoin, which has found itself championed more as an asset than a currency, Litecoin is rapidly rising as a popular tool for transactions, largely due to its notable advantages in terms of speed and scalability.

Although not necessarily a universal solution quite yet, it has long been a frontrunner in the field thanks to the common analogy of Litecoin being silver to Bitcoin’s gold for the cryptocurrency space.

Litecoin is being increasingly adopted by e-commerce as a means of transaction, but it really shines in the e-gaming space where it has won numerous fans. Especially in Asia, where online gaming is extraordinarily popular, Litecoin has built a tremendous userbase that utilize it to transact across blockchain-based gaming platforms that are rapidly growing in acceptance.

The Competition Litecoin Faces

A notable decision that characterized the growing divergence in opinions within the Bitcoin community was realized last summer with the hard fork decision that led to the emergence of Bitcoin Cash.

The idea behind this solution was to expand the block size to 8 MB from Bitcoin’s current 1 MB, enabling greater scalability and a currency solution that was more geared towards transactability than an asset for speculation. Just like Litecoin has focused on speed to help it garner greater adoption and use cases, Bitcoin Cash in many ways is seeking to emulate Litecoin’s scalability.

However, apart from the decision to change block size for competition, second layer solutions are being advanced to fix some of Litecoin’s perceived inefficiencies.

SegWit, or Segregated Witness, was designed to speed the record-keeping process and enable better transactability alongside lower fees for Litecoin and Bitcoin.

This idea was formulated to allow the incorporate of second layer solutions, or frameworks that are designed to be built on top of the existing chains to supply greater functionality, mainly geared towards the purposes listed above.

One of the biggest developments to come from SegWit is the Lightning Network, an off-chain protocol designed to help offset several problems associated with the original blockchain designs.

Apart from improving scalability by enabling the confirmation of billions of transactions, it allows instantaneous transfers that can be conducted off-chain without the need for third party oversight for transactions and record-keeping. So though Litecoin might have the edge in terms of speed and costs, this solution may see Bitcoin overcome many of its own associated difficulties.

The Key to Unlocking Litecoin’s True Potential

Just like any other emerging platform, Litecoin’s longevity will be largely dependent on how quickly it is adopted as a solution for the problems it seeks to solve.

Apart from its original design, which lends itself to better scalability and transactability thanks to reduced confirmation times and low costs, second layer solutions have the potential to revolutionize micropayments, optimize speed, and make Litecoin more attractive for numerous reasons.

In the end, the cryptocurrency’s value as a solution will be demonstrated by how it is embraced by community participants and the velocity of transactions within the ecosystem.

If transaction numbers climb and more online brokers offer Litecoin trading, the ecosystem will also likely ascend in value and appreciate in tandem with rising interest in its application.

However, absent more widespread adoption, Litecoin will face an uphill battle to accomplish its goal of revolutionizing value transfers.

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